Tag Archives: Pension Schemes

Can I Have a Tax Free Annuity?

There is no such as a tax free annuity. However, in a way, everyone can receive a kind of ‘tax free’ annuity, thanks to the tax free lump sum from your pension pot that you can use to purchase an annuity.

Currently you are able to get up to 25% of your pension pot as a tax free lump sum, which can then be used as an annuity fund to invest in an annuity scheme. An annuity scheme turns the lump sum into annual or monthly income during retirement. However, it is important to note that annuity income, which is the income you receive from an annuity provider, is treated as taxable income. This means that although your annuity fund can be tax free, it is not entirely a tax free Annuity, and the income you actually receive from the annuity provider is taxed by HMRC.

The amount is taxed at the appropriate tax band, depending on how much money you receive from the annuity. The annuity provider will deduct the tax before you receive the payment. The fact is that for most pension schemes today – the pension savings need to be converted into an income by investing the money into some investment product. This could be an annuity or an income drawdown plan.

An annuity is where the savings are converted into a regular income and an income drawdown plan is where you withdraw money from the savings as and when you need them. The advantage of an annuity is that although the income is taxed and there is no such thing as a tax free annuity, it is guaranteed for the agreed term of the annuity and you receive it at regular intervals. Depending on the type of annuity you can receive a taxable income for as long as you live, or until the end of a fixed term.

While annuity turns your savings into guaranteed income, income drawdown keeps your savings invested in external investments like stocks and shares, and you can withdraw the money as and when you need additional income. This is also taxable as per the appropriate tax band.

A tax free annuity does not exist in the sense that the income from an annuity is always taxed. However, everybody is entitled to a tax free lump sum from their pension savings which can be used to generate an income during retirement, either through an annuity or through an income drawdown plan.

What are Pension Triviality Rules for Small Pension Pots

Many consumers who have smaller sized pension pots would ultimately like to withdraw their pension in one lump sum payment. This one lump payment can often come in quite handy for many consumers who are on the verge of embarking on their retirement years. They are able to pay off debt before retiring, fund a vacation, or even put some money in the bank for any future emergencies that may arise. However, there are rules that govern how the lump sum can be taken and under what conditions it is actually possible to do so.

In order for a consumer to take their pension pot as a lump sum, they must be at least 60 years of age. The qualification for taking the lump sum also depends on the size of the pension pot in that only smaller sized pots can be taken as a lump sum. A consumer may qualify if one of their pension pots is worth £2,000 or less. They may also qualify for the lump sum if the total of all of their pension pots equals £18,000 or less. If the pension pot is £2,000 or less there are some very specific rules that need to be followed in order to extract the funds as a onetime lump sum payment and these rules depend on the pension scheme used.

For those whose total of all pension pots equals £18,000 or less, the consumer may be able to take all of their pension pot contents as a lump sum. This can be done even if the consumer has started to take from one of their pensions. This kind of lump sum is referred to most often as a “trivial” lump sum, or a “trivial commutation”.  There are guidelines by which consumers can take their payment as a lump sum under this scheme. First, the consumer has to remove all of their savings from each one of their pension pots, if more than one, within the same pension scheme as a lump sum. These cannot be broken out or paid out individually. They can be paid out separately only if they are from different pension schemes. Secondly, the consumer must have all of their pension pot savings valued on the same date, which is not to exceed three months out from the date they would take their lump sum. This is to ensure that the valuation is accurate and still within the guideline parameters.

If a lump sum is taken by the consumer instead of their small pension before they began to get that pension, only 75% of the lump sum is eligible to be taxed. However, if the consumer had already been getting payments from their pension and then decided to take the rest as a lump sum, the entire lump sum payment is eligible to be taxed.  The amount of tax paid by the consumer will depend on their total income for the year.

In order for a consumer to take all of their pension pot as a lump sum, they should contact their pension scheme administrator to ensure that their scheme allows for a lump sum payment. Then the consumer will be able to have their pension pot(s) valued to ensure that they meet the criteria and eligibility for removing their pension contents in the form of a onetime lump sum payment. For many consumers, receiving the lump sum, if eligible, can be incredibly helpful when trying to fund retirement years. It can be used to pay off debt, fund a vacation, or be used to ensure that healthcare or long term care is in place.